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FREQUENTLY ASKED QUESTIONS

 

Here are a few of the most frequently asked questions concerning this issue.

 

 

 

 

1. How is the price per acre determined when offered a lease to sign?

 

Typically there are three factors that determine the price offered for rental/bonus payments.

 

1. Size of property,

And to a lesser extent its position in relation to other key properties. Grouping your properties with other landowners when negotiating can give you substancially more bargaining power, however you must accept the terms of the majority of the group.

 

2. Competition from other energy companies.

If no other companies are offering leases you may be early in the process. Waiting until there is more competition is an option.

 

3. Probability of discovering natural gas.

As energy companies explore and drill nearer your land, they have a much better idea of the probability of discovering gas and hence their interest in drilling. Landowners who have not leased by that point may command much higher prices. Realize that there is a risk in waiting in that energy companies may LOSE interest in an area so that you might not get to lease at all.

Many times prices are set by the lessee (landmen, energy company) for the standard lease initially offered to all landowners as a matter of policy. Your ability to change or improve the lease is predicated on the three factors above.

 

 

 

 

2. Is there a standard lease? What are the uniform terms of a lease?

 

Each company has its own "standard lease". However most leases are different from company to company. Most leases contain very similar terms with small differences in wording that may mean a great deal in terms of your rights, royalties and other critical factors. A good example of a lease can be found here. Sample Lease

 

3. What is the difference between mineral rights and oil and gas rights? How are surface rights considered?

 

There is some disagreement on this topic, however it is generally stated that mineral rights is a a term that means "sub-surface rights". Property ownership is divided into two estates, surface ownership and mineral rights (sub-surface). In general, mineral rights owners are granted access to surface rights to the extent needed to enjoy their specific rights, with reimbursement to the surface owner for damages and other compensation for losses. Ownership of mineral rights may or may not include oil and gas, depending on how the lease is written. Generally specific minerals are delineated and mentioned individually, including oil and gas or hydrocarbons.

 

4. For how long should a lease be signed?

 

Typical leases are offered that contain a five year primary period with a roll over into a second five years IF certain conditions are met. Typically these include continuing exploration, drilling, or other work related to exploration or drilling.

 

 

 

 

5. What regulations are most commonly enforced by the Department of Environmental Protection in natural gas leasing?

 

DEP is responsible for the permitting and inspection of wells. Their scope generally includes all aspects of drilling that effect the environment and public safety. DEP does NOT regulate terms of landowner leases or the terms contained therein.

 

From DEP website:

DEP enforces Pennsylvania's oil and gas laws relating to resource management, well construction activities and waste management practices.

An operator must secure a bond before applying for a well permit. DEP approves bonds and well permits, inspects wells and environmental controls, and permits and inspects waste disposal facilities and waste management activities. Operators must submit reports on well completion, waste management, annual production, and well plugging. DEP has the authority to take action to enforce compliance with applicable laws and to seek civil penalties for violations of these laws.

The Commonwealth of Pennsylvania is not involved in regulating lease agreements between mineral property owners and producers, except that minimum royalty payment is prescribed by law. Lease agreements are contractual matters between private parties. DEP does not audit payments, read or calibrate meters or tanks, or otherwise get involved in lease matters.

Well operators are required to report production annually, and state agencies must keep this information confidential for five years, except for enforcement proceedings, as provided in Section 212 of the Oil and Gas Act, 58 P.S. § 601.212.

 

DEP Website Fact Sheet

 

6. How do income and royalties from natural gas leases affect my taxes, assessment and estate planning?

 

Both types of income from oil and gas leases are subject to income taxes and reported under "income from royalties, etc." Federal income tax allows deductions for basis using two methods. However, lessors may calculate a 15% basis reduction to allow for the value of resource extracted.

 

Generally counties do not change real estate appraisals due to wells located on the property, however leases may contain provisions that the Lessee pay for all increases in assessments, CREP, and Clean and Green due to gas exploration.

 

 

 

 

7. What is a drilling unit?

 

The acres mapped and specified in the drilling application/permit as those thought to contain/produce natural gas. Drilling units may or may not match property boundaries.

 

 

 

 

8. What is the difference between the grouping of landowners and the pooling (unitization) of acres for a drilling site?

 

Great question! Landowners may group their acres together during leasing negotiations to maximize their rental rates and lease terms. (Note that this grouping during lease negotiations DOES NOT mean that drilling operations and/or royalties will be shared with the same group.) When obtaining a permit to drill a well, the drilling company outlines the area on a map where it thinks the gas lies. This boundary may or may not follow property boundaries. Landowners with all or part of their land within the defined boundaries are pooled together for royalty purposes. Several wells may be drilled over many miles tapping the same reservoir or geological formation and the production recorded by the gas company as a"unit".

 

Schlumberger Oil and Gas Definitions:

pooling

The accumulation of smaller tracts of land, the sum total acreage of which are required for a governmental agency to grant a well permit or assign a production quota or allowable to an operator

 

unitization

The combining of multiple wells to produce from a specified reservoir.

 

 

 

 

 

9. What are the most common addendums in gas leases? Can I change lease terms or can I delete terms?

 

Thats a tough question. Each landowner has specific objectives for owning their property. Those goals that have top priority (hunting? Recreation?) are usually protected/addressed by the addendums. There are literally hundreds of possible addendums available to you, most of which take an attorney to craft so that the addendum is clear and effective.

 

 

 

 

10. How are bonus and delayed rental payments usually made by the company to a new lease holder?

 

The lease determines how and where payments are made for all terms of the lease. Generally the initial rental/bonus payment is authorized by a sight draft, which allows the company a certain number of days to search titles and other legal matters before actually paying the landowner. Delay rental payments are made periodically (monthly?) after some period of inactivity specified on the lease.

 

delay rental

Consideration paid to the lessor by a lessee to extend the terms of an oil and gas lease in the absence of operations and/or production that is contractually required to hold the lease. This consideration is usually required to be paid on or before the anniversary date of the oil and gas lease during its primary term, and typically extends the lease for an additional year. Nonpayment of the delay rental in the absence of production or commencement of operations will result in abandonment of the lease after its primary term has expired. ............Schlumberger.com

 

 

11. How are royalties determined, calculated and paid by the company if drilling occurs?

 

 

 

 

 

 

12. What redress is there for settling disputes with an energy company?

 

 

 

 

 

 

13. Could you list the steps an energy company would take to lease and drill with a landowner from start to finish?

 

 

 

 

14. What is the difference between a condition and a covenant in a lease?

 

 

 

15. How do I know if I own Mineral rights on my property?

 

A look at your deed might reveal if the mineral rights were severed before you purchased theproperty. However, a search of the grantor/grantee index int he courthouse records will bring up any other documents filed for your property. The register and recorders office would be glasd to help you.

 

 

 

 

 

16. Where in the Courthouse can I find gas leases recorded?

 

The Register and Recorders Office can help you do a search for documents filed.

 

 

 

 

 

17. What types of seismographic testing are there?

 

 

 

 

 

 

18. Is there a Better Business Bureau for energy companies leasing acreage? Does the Attorney General have information or tips on gas leasing?

 

 

 

 

 

 

 

19. Regardless of the company you lease with, are there any items in a lease that are not negotiable?

 

 

 

 

 

20. What is coal-bed methane and how does it relate to natural gas leasing?

 

 

The coalification process, whereby plant material is progressively converted to coal, generates large quantities of methane-rich gas which are stored within the coal. The presence of this gas has been long-recognized due to explosions and outbursts associated with underground coal mining. Only recently has coal been recognized as a reservoir rock as well as a source rock, thus representing an enormous undeveloped "unconventional" energy resource. But production of coalbed methane is accompanied by significant environmental challenges, including prevention of unintended loss of methane to the atmosphere during underground mining, and disposal of large quantities of water, sometimes saline, that are unavoidably produced with the gas.

For more info: http://naturalgaslease.pbwiki.com/f/Coalbed%20Methane.mht

 

21. How long does the drilling process usually take? weeks, months, years?

 

 

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